Esicorp, Inc. v. Liberty Mut. Ins. Co.

The court holds that most of a company's claimed losses arising from the need to repair defective pipe welds that a laboratory had failed to discover were not property damages covered by the laboratory's insurance policy. The company did not argue that the defective pipes burst or caused accidental injury to surrounding property as a result of the laboratory's negligent inspection. Rather, the company claimed that incorporation of the defectively welded pipe sections into a partially completed pipe system was covered property damage and, thus, all direct and consequential costs resulting from that damage are covered losses. The court first holds, however, that several courts construing the definition of "property damage" have concluded that the mere incorporation of a defective component is not property damage because it does not result in physical injury. The court additionally holds that recent cases demonstrate that the Supreme Court of Missouri would likely hold that there is no property damage unless and until the incorporation of a defective product or component results in the physical injury to tangible property in at least some part of the system. Likewise, the costs of repairing the defective welds, standing alone, are not covered injuries. The court further holds that although the laboratory settled with the company for over $ 2 million, paying $ 125,000 and satisfying the remainder of its settlement obligation by assigning its rights against its insurer to the company, Missouri law limits the company's recovery to that portion of the settlement that reflects the laboratory's liability for covered losses. Therefore, because the insurer already paid for those losses, the district court's order requiring the insurer to pay the entire settlement amount is vacated.